I want to point you to excellent reporting by Chris Drosner (aka the Beer Baron) over at the Wisconsin State Journal on the potential impact of the two competing beer tax bills. Check out his article here. We covered the Beer Institute’s Fair BEER Act and the Brewers Association’s Small BREW Act last week here, and through insightful discussion with Chris, edited it to correct and improve our coverage. Good stuff, and glad the Brewery Law Blog can help create a dialogue on these important topics, which is what Doug envisioned when launching five years ago. Most importantly for this story, Chris helps tell the part that keeps getting lost in other coverage; the Fair BEER Act is not just beneficial for “big beer.” Of course, that act would cause the biggest cuts to the federal revenue, but may also position the majority of today’s brewers for the most explosive growth. Check out Chris’s article for more details on that. What do you think?
Note: I should disclose, I’m a member of the Brewers Association. However, as a member and given my position as a small-brewery lawyer, I’m interested in what’s best for craft breweries but also the beer industry at large. At times, the line drawing between “us” and “them” and “our growth” vs. “their growth” can seem less important, and this tax scenario might be a case where everyone could come together and agree that more jobs and growth in the entire beer industry is a good thing. After all, consumers still seem to be cheering for the little guys, even when they’re not so little anymore. I doubt that tax cuts and attendant growth across the board will dupe craft consumers and change their David-leaning preferences. Even if big beer exposes more would-be craft beer lovers to the product through their efforts to become more relevant, I think that, just like all of us did, we’d eventually still see those consumers start coming out to their local taprooms, plugging into the truly craft beer scene, and evangelizing the awesome awesome stuff microbreweries are making today. That excites me more than line drawing on these tax issues here. Either way, passage of some measure of brewery tax reform would be a wonderful thing, and a huge accomplishment for the industry.
Opening and running a brewery is complicated, and Washington Brewery Law Resources aren’t necessarily all neatly gathered in one place. It can be hard to know where to look when your curiosity encourages you to start poking around. Today, I’ll do my best to help you start your research on how breweries in Washington State are regulated. There’s a bevy of laws/code/regs out there, that’s for sure. Here are some jumping off points for your legal excursions.
Keep in mind, these sources aren’t exactly written with readability as a primary objective. Important nuances pop up in all different places. That’s what we’re here for, if you’re ever not sure about something. Indeed, it’s through the code, and our understanding of it, that we can help answer all kinds of questions on the fly, such as: (1) Can my Washington brewery deliver beer to customers in Seattle?; (2) If I’m only selling beer within Washington’s borders, do I still need a Certificate of Label Approval?; (3) May those under the age of twenty-one come into my brewery without us having food service? The list of fun questions that vary from state to state goes on.
For anyone interested in checking out primary Washington Brewery Law Resources, here are some links along with my notes to help you navigate them.
Washington Brewery Law Resources – State Brewery Law
Revised Code of Washington. This is the law that the state legislature creates and revises. Primarily, you’re looking at the content in RCW 66, although keep in mind that other provisions relating to your business, potential distribution agreements, etc. all fall in other places in the code.
Washington Administrative Code. This is where administrative agencies put their regulations. In Washington, the primary administrative authority is the Washington State Liquor Control Board. They were created by the legislature by way of RCW 66 and given authority to do certain things relating to booze in Washington State. Any regulations they promulgate become part of the Washington Administrative Code. Unfortunately, this means that there are often provisions in RCW that address some of your questions, and then provisions in WAC that address other questions. It just depends on whether the legislature contemplated something or it’s LCB creating regulations by virtue of its authority.
Between those two, that’s the heart of Washington brewery law. Keep in mind there are some sanitation requirements set forth by the Washington State Department of Agriculture, and your compliance therewith is a part of maintaining your LCB microbrewery license. Further, there are some places where the County and your Municipality step in, particularly with respect to health codes and building codes.
Washington Brewery Law Resources – Federal Brewery Law
Of course, we all know that state and local government isn’t the final authority on breweries in Washington. Indeed, Uncle Sam, through the Alcohol and Tobacco Tax and Trade Bureau (TTB), has a say on a number of matters. When it comes to TTB, you’ve got to jump to the Code of Federal Regulations (CFR) to see all the regulations they’ve promulgated, and Title 27 is the place to go. Bear in mind, if you’re brewing off-the-wall beers, such as those without hops, the Food and Drug Administration (FDA) may be your labeling authority. And, very technically, FDA has concurrent authority over your brewing business—but TTB really is the place to go when you have questions of federal brewery law. Fortunately, they’ve put together helpful resources on their website to help you wade through labeling and advertising issues.
Edit: 2/15/2015 at 8:55pm PST. Thanks to journalist and Twitter comrade @WSJbeerbaron (Chris Drosner) who is working on a piece for The Beer Baron column relating to beer tax reform, he spotted a correction for the article. I had read language in the Fair BEER Act to maintain certain production rate carveouts for smaller producers. ‘Tis not the case. I have updated the article and calculations to reflect this. Cheers to Chris for taking on this heady issue to get the word out; I’ll link to his article when it’s in. I anticipate he’ll have a lot of great analysis coming your way.
Beer tax reform might be on the horizon, as two competing bills are teed up for debate in Congress. On the one side is the Beer Institute, which advocates for all sizes of breweries but is known for having Anheuser-Busch InBev and MillerCoors among its interested parties. They’re standing behind the Fair BEER Act and, as we’ll get to in a minute, the majority of breweries out there may be the biggest fans of what this act would offer. Another bill out there is the Small BREW Act, which the Brewers Association is behind. The Brewers Association advocates for the interests of those brewing under 6 million bbl per year. As we all know, that 6 million bbl distinction is big enough to sweep in a brewery like Boston Beer Co. (Sam Adams), but small enough to keep the two big guys out. As you’ll soon see, the Small BREW Act spells tax breaks across the board, including advantageous ones for the pretty-big-but-still-craft breweries, but not as dramatic of breaks for the majority of breweries in America. The Fair BEER Act would provide lowest tax rates of all.
What do the federal beer tax bills look like, whose interests are we looking at here, and why should you care? Let’s start with how federal brewery tax law operates right now. Then, I’ll walk through each of the proposed bills, and wrap up with examples comparing tax rates for different-sized brewing operations under all three schemes. Let’s dig in.
Brewery TTB Tax Law Part I
How Beer is Taxed Right Now at the Federal level
Presently, the Alcohol and Tobacco Tax and Trade Bureau taxes beer at two different per-barrel rates. There’s the Regular Rate of $18. Then, there’s the Reduced Rate of $7. Here’s how those rates are applied:
Small Breweries – 60,000 bbl or less? Pay $7/bbl
If you brew 60,000 bbl or less in a year, like the vast majority of breweries, you pay the Reduced Rate of $7/bbl (in addition to whatever your state tax rate may be).
If you brew more than 60,000 bbl but less than 2 million bbl (such as a brewery like New Belgium or Dogfish Head, for example), you pay a mixed rate. You get to take advantage of the $7/bbl rate for your first 60,000 bbl ($420,000, which is up to a discount of $660,000 off the regular rate). After that, you must pay the Regular Rate of $18/bbl for the rest of your lot.
If you brew more than 2 million bbl (so, the two big guys, and also a brewery like Boston Beer Co. (Sam Adams) or D.G. Yuengling & Son (Yuengling)), you pay the Regular Rate of $18 for everything. The prime point being, they’re paying $11 more per barrel on the first 60,000 bbl than everyone else (that’s $660,000 more on those barrels).
As we all know, everyone would love to pay less, and that’s what this is about.
Brewery TTB Tax Law Part II
Fair BEER Act – Backed by the Beer Institute (Which includes the interests of Anheuser-Busch InBev and MillerCoors)
This bill would offer the most tax advantages to the vast majority of breweries out there, eliminating federal excise tax altogether for the typical neighborhood brewery and most that are engaged in community-wide distribution. At the same time, this bill would make even the biggest of brewers eligible for tax breaks. Essentially, it’s a graduated scale that applies to all breweries—and almost all breweries (90%) are at the bottom of the scale, which would mean zero excise taxes. Take a look.
The first 7143 bbl: Pay $0/bbl.
-Thus, if you brew under 7,144 bbl/year, you’d pay no federal excise tax. $0. This would mean roughly 90% of American breweries would pay no federal excise tax. This sounds pretty good for all of the small breweries and start-ups out there. Keep in mind that 7,144 bbl/year is more than 137 bbl produced per week. That’s a lot of headroom for most of our breweries today. Indeed, likely far more than the wildest dreams of many of the family-owned breweries we’re seeing nestle into our neighborhoods. Just to ground the numbers, that’s more than 13 brew days a week on a 10bbl system. Not possible.
The 7144th bbl/year to 60,000th bbl: Pay $3.50/bbl.
-If you brew more than 7144 bbl/year and up to 60,000 bbl/year, you’d see your federal excise taxes cut in half. It’d be just $3.50/bbl. To ground that bbl/year figure, 60,000 bbl/year would translate to more than 1153 bbl/week. If you had a 100bbl system, that’d be more than 11 brew days a week. Again, not possible.
From the 60,001 bbl/year to 2 million bbl: Pay $16/bbl.
-So, this is a cut for the “medium” breweries noted above—eligibility for the lower breaks, with $2 off per barrel thereafter up until the two millionth bbl.
Everything after the 2 millionth bbl in a year? Pay $18/bbl.
-No change. This is the current rate, just that it only starts applying at your 2 millionth bbl. Before that, all breweries are eligible for the reduced rates on initial bbl leading up to it.
The Wrap-up on the Fair BEER Act:
Federal excise tax would be eliminated for nearly all craft breweries, putting an extra $7/bbl back into the brewery’s pocket. Most notably, huge breweries would get a break on beer leading up to the two millionth bbl. We’ll see how this plays out when we crunch the numbers later.
Brewery TTB Tax Law Part III
The Small BREW Act backed by the Brewers Association:
Craft Breweries – <6,000,000 bbl/year
-Change the definition of Small Brewery from those that produce under 2 million bbl/year to those that produce under 6 million bbl/year. So, sweep in folks like Boston Beer Co., just like the Brewers Association definition does by its definition.
-Create the following tax structure for all Small Breweries:
$3.50/bbl on the first 60,000 bbl (That’s the current reduced rate cut in half)
$16/bbl on the next bbl leading up to 1,940,000 bbl (a reduction of $2/bbl, but also a reduction on the quantity of barrels it applies to.)
$18/bbl on everything beyond 1,940,000 bbl.
Not Craft Breweries – >6,000,000 bbl/year
-$18/bbl on everything.
The Wrap-up on the Small BREW Act:
For most breweries, federal excise tax would be cut in half. The biggest winners are the folks like Boston Beer Co., who would become eligible for the reduced rate on the first 60,000 bbl and also a $2/bbl cut on a bunch of beer, too. Huge savings here, as we’ll walk through in a second. Though, again, for the majority of breweries in the United States, the tax breaks are not as dramatic under the Small BREW Act as they are under the Fair BEER Act.
Brewery TTB Tax Law Part IV
The three tax programs compared (Current, Fair BEER Act, and Small BREW Act):
Before providing a look at real numbers below, the gist is this. The Fair BEER Act would result in the lowest taxes of all strategies, and it impacts the majority of breweries in the United States by eliminating federal excise tax entirely. The biggest difference in federal brewery tax policy with the Fair BEER Act is that the biggest of the big remain eligible for significant tax breaks. In contrast, the Small BREW Act would result in more even-handed savings for craft breweries, no matter the size, but provide no benefits to the big guys. Nevertheless, the Small BREW Act lets a swath of extremely-big-but-still-considered-to-be-craft brewers get in on the tax breaks, while keeping things the same for the biggest of the big. (Side note here about conglomerates, just so no one is confused. These are called “controlled groups” and tax rate eligibility is calculated by adding up all of the production rates of all of the breweries within the group. So, just because A-B InBev owns Elysian now, they wouldn’t get tax benefits off of Elysian’s production rate.)
Check out the numbers below—note that I’m using formulas, but they were formulas made by this human whose best skills undoubtedly tip on the verbal side. The figures should give you the big picture of the competing bills, what’s at stake, and why different breweries at different sizes feel the way they do. If you spot any errors, please let me know—and I invite someone to make a fluid graph of all of the equations, which is beyond the time I have for this project at the moment:
If you brew 100 bbl/year:
Current Federal Excise Taxes on Beer: $700 Federal Taxes Under the Fair BEER Act (FBA): $0
Federal Taxes Under the Small BREW Act (SBA): $350
If you brew 500 bbl/year:
Current: $3,500 FBA: $0
If you brew 1,000 bbl/year:
Current: $7,000 FBA: $0
If you brew 5,000 bbl/year:
Current: $35,000 FBA: $0
If you brew 7,000 bbl/year:
Current: $49,000 FBA: $0
If you brew 7,143 bbl/year:
Current: $50,001 FBA: $0
If you brew 7,145 bbl/year:
Current: $50,015 FBA: $7 SBA: $25,007.50
If you brew 10,000 bbl/year:
Current: $70,000 FBA: $9999.50 SBA: $35,000
If you brew 20,000 bbl/year:
Current: $140,000 FBA: $44,999.50 SBA: $70,000
If you brew 50,000 bbl/year:
Current: $350,000 FBA: $149,999.50 SBA: $175,000
If you brew 59,999 bbl/year:
Current: $419,993 FBA: $184,996 SBA: $209,996.50
If you brew 60,001 bbl/year:
Current: $420,018 FBA: $185,015.50 SBA: $210,016
If you brew 80,000 bbl/year: (Deschutes at approx. 89,000 bbl)
Current: $780,000 FBA: $504,999.50 SBA: $530,000
If you brew 100,000 bbl/year:
Current: $1.14 million FBA: $824,999.50 SBA: $850,000
If you brew 150,000 bbl/year: (Dogfish Head at approx. 175,000 bbl)
Current: $2.04 million FBA: $1.62 million SBA: $1.65 million
If you brew 200,000 bbl/year:
Current: $2.94 million FBA: $2.42 million SBA: $2.45 million
If you brew 250,000 bbl/year:
Current: $3.84 million FBA: $3.24 million SBA: $3.25 million
If you brew 300,000 bbl/year:
Current: $4.74 million FBA: $4.02 million SBA: $4.05 million
If you brew 500,000 bbl/year: (New Belgium at approx. 712,000 bbl; Sierra Nevada at approx. 800,000 bbl)
Current: $8.34 million FBA: $7.22 million SBA: $7.25 million
If you brew 1,000,000 bbl/year:
Current: $17.34 million FBA: $15.22 million SBA: $15.25 million
If you brew 1,500,000 bbl/year:
Current: $26.34 million FBA: $23.22 million SBA: $23.25 million
If you brew 1,939,999 bbl/year:
Current: $34.26 million FBA: $30.26 million SBA: $30.29 million
If you brew 1,940,001 bbl/year:
Current: $34.26 million FBA: $30.26 million SBA: $30.29 million
If you brew 1,999,999 bbl/year:
Current: $35.33 million FBA: $31.22 million SBA: $31.37 million
If you brew 2,000,001 bbl/year:
Current: $36 million
FBA: $31.22 million SBA: $31.37 million
If you brew 2,500,000 bbl/year: (approximately Boston Beer Company)
Current: $45 million FBA: $40.22 million SBA: $40.37 million
If you brew 5,999,999 bbl/year:
Current: $108 million FBA: $103.22 million SBA: $103.37 million
If you brew 6,000,001 bbl/year:
Current: $108 million FBA: $103.22 million
SBA: $108 million
If you brew 67,000,000 bbl/year: (approximately MillerCoors)
So, why’s a Seattle-based craft brewery law firm like Reiser Legal pontificating about Indiana beer laws? Actually, it’s because we represent Washington breweries that we care. And, no matter which brewers’ guild you belong to or which state of bountiful craft brews you call home, I’ll explain why this issue of federal constitutional law is worth your attention.
First, a little background. I’m an Indiana native. That means I grew up in a place where you couldn’t buy booze on a Sunday. Technically, you could buy it on a Sunday, but only if you (1) drove to a different state to get it or (2) were okay going to a bar or restaurant to enjoy some libations there. In other words, until 2010, you could not go into the market, buy brews, and bring them home on a Sunday.
What changed in 2010? In that magical year, the legislature made an exception for just about all craft breweries. (It’s no coincidence that in the years leading up to 2010, Indiana breweries were opening at unbelievably awesome rates.) The 2010 exception gave breweries a unique advantage. Suddenly, the only way to buy carryout beer on a Sunday was to stop by your local craft brewery.
As a consumer, the change in the law rocked. For starters, you no longer had to strategically plan your grocery shopping, planning ahead to stock up on swill before Sunday’s game. The change also affected the good folks of Ohio, as us Hoosiers no longer had to visit their glorious drive-through Sunday beer operations by force, but by choice. However, it wasn’t until, from a legal perspective, I started digging into federal constitutional issues affecting the brewing industry that I realized the problem with Indiana’s freshly-changed regulatory scheme.
Indiana’s scheme means that 100% of carryout beer sold on Sundays is made in the state. Put another way, out-of-state brewers have no access to Indiana’s booming Sunday carryout market. I thought about it, researched it, wrote about it, and put it all together into a Law Review Note called “Brewing Tension: The Constitutionality of Indiana’s Sunday Beer-Carryout Laws.” If you’re ambitious, you can read the note now. But, over the next couple of days, I’ll quickly (and painlessly) take you through why Indiana’s beer laws need deeper change, and why laws like these are bad for the entire industry—and might even affront our Constitution.
Stay with me this week as we talk a bit about beer history, including (1) things you might know, such as the bummer of a time that was Prohibition; or things you might not, such as (2) the crime that abounded during those “dry” years; and (3) the aims of the Twenty-first Amendment, as interpreted by the United States Supreme Court throughout the decades. Along the way, I’ll cover some need-to-know background about the common three-tier distribution system, including how far states can go in regulating booze shipped into and out of the state. We’ll touch on the landmark case of Granholm v. Heald, some decisions in the 7th Circuit interpreting it, and we’ll wind up on why Indiana’s law, as it stands, might not be constitutional. Through it all, I’ll pass along key takeaways for those seeking change in their own states.
If you haven’t checked out the “Free Craft Beer!” New York Times Op-Ed from March 29, 2014, it’s worth a read here. Steve Hindy from Brooklyn Brewery, in collaboration with the gang at the Brewers Association, put out thoughtful commentary on so-called “franchise laws,” asking for change. Following up in the last couple of days, Brewers Association president and homebrewing papa Charlie Papazian released further commentary here.
For those not living in a strict franchise law state, or for those who refer to these laws under a different name, here’s an overview, though we encourage you to check out Hindy’s and Papazian’s pieces. Effectively, a franchise law forces breweries into single-distributor relationships, while making it very difficult to get out of those relationships. Imagine the too-common scenario of being signed with one distributor, then watching while your distributor lights up tap handles and shelves with a competitor’s brand, yet your beer sits on the warehouse shelves. Even if your contract has a “with or without cause” provision to terminate the relationship, state law can trump and require only certain kinds of “cause” for you to get out. Even if you have a good case—say they’re putting outdated beer on the shelves— it’s not going to be a fun case or a cheap one to duke out in court if your distributor pushes back. For start-up breweries, litigation cost may make it wholly impossible.
Now, we’ll come right out and say that many, many brewers have awesome relationships with their distributors—but just like any relationship in life, not every one is going to be a perfect fit, especially considering the close relationship brewers forge with their distributors. In seeking reform, most brewers aren’t asking to bypass distributors and take on full-blown self-distribution. To that, we can understand why states have a mega interest in holding onto in-state distribution channels to safeguard a massive tax-revenue stream. For example, imagine if all products sold over the Internet with no sales tax instead had to go through an in-state distributor before reaching your door. With that funneling effect, you can bet the state would raise more tax revenue than asking people to self report those out-of-state purchases, like most states do right now. It’d be a pretty sweet deal for the state, but an unconstitutional one, thanks to the Commerce Clause. Alcohol is different, though, by interpretation of the 21st Amendment, and states can force this in-state funneling effect. Again, we get why states want to keep doing so, since they can. But whether it’s this funnel or that funnel, it seems to matter much less, especially when one party wishes to terminate an agreement, and the negotiated agreement—but for the trumping state law—says the party can do so.
At any rate, given that states seem acutely aware of the jobs our breweries are creating (so long as their delicious beer keeps getting put out on the shelves and purchased), and the public is more aware than ever when brewers choose not to distribute in their states (many breweries skip states to avoid these wonky laws), it’s a prime time to put franchise-law discussion on the table. We applaud Steve Hindy, Charlie Papazian, and the BA for bringing these issues up in such a thoughtful manner, especially as some state legislatures recently have been considering bills that would make it practically harder to escape a relationship that’s just not working the way a brewery hoped, planned, or even agreed it would.